Interest Rate Hikes on the Horizon? Not Likely

Recent weeks were not bad for those gold investors' hearts filled with golden
hopes. The price of gold depends on many factors, but past patterns can give
us important hints and suggest which of them are to be carefully studied and
properly comprehended. If history were to teach us anything about gold's past
market values it would most primarily be the following: watch out for the feds!
Wise observation of government policies is the main driving force for what
is happening in the gold market (surely along with supply factors in the longer
run). As we discussed a month ago, this is the main reason for the observed correlation
between the gold price and the interest rates. Not because interest rates
per se are always casually linked to the gold price. But because interest rates
are a reflection of current government policies.

This time we are going back to the possible interest rate hike subject, so
passionately and almost obsessively discussed in the media. Last time, since
the major change of the Fed chairman, we have heard that interest rate hikes
are far, far beyond the horizon. Despite this, most of us apparently believe
that interest rates will sooner or later have to be raised to the pre-stimulus
range. It is unclear and remains a big mystery when this is likely to happen.
Lately more has been said by the Fed (Janet Yellen) about this mystery of raising
interest rates at the moment. We will get back to this in few paragraphs, but
let us will debate the initial point. Despite what many observers claim, it
simply may not be the case that the Federal Reserve should raise the interest
rates. Actually the United States may still stay and bathe in a slumpy recession-type
of environment for years to come. And the interest rates may stay as low as
they are right now without any hikes visible on the horizon.

How may one support this thesis? Isn't it obvious that rates have to go up
sooner rather than later? They may, but we refuse to simply take this for granted
and echo that those hikes are coming closer and closer. Let us have a look
at the case of Japan starting from the nineties, certainly a very good parallel
of the United States right now. After a huge credit bubble that burst during
the beginning of the 1990s, the real estate market collapsed along with the
stock market. Debt stayed at record levels, and additionally, public debt also
reached its highest peak in all of history. In these conditions the Bank of
Japan started lowering the interest rate to absurdly low levels, of less than
one percent. In the real terms the rates became virtually negative. This may
have been understood as a temporary tool in order to support failing businesses.
The raises of the interest rate were to happen one day. In the end it was not
a temporary tool at all. It became permanent. Rates in Japan stayed low for
a very significant period of time. They are still below one percent and have
been staying at this level since 1995. 19 years and not much has changed. Japan
is still in a way involved in the fight with the recession that started twenty
years ago. The tools triggered back then are still in place today.

The same can happen with the United States.

Increases of the interest rates are not necessarily on the horizon. They can
stay low for a very, very long time. Notice that they already stayed low for
a relatively long time. Ben Bernanke set the interest rate close to the zero
boundary at the end of 2008. They are staying at this level for a sixth consecutive
year. Despite the fact that as soon as we reached a zero interest rate policy,
experts started to debate when the time of reversal should come. Some of the
optimists believed that it might happen within a few months. After a few quarters
the story tends to come back like a boomerang. And as soon as it is about to
hit, it disappears again.

It is really hard to remind oneself that for at least one year, no recognizable
expert has shown up and tried to scare us about upcoming interest rate hikes.
Although we do not believe that the USA will necessarily repeat Japan's case,
we refuse at the same time to take for granted that hikes are coming.

In our opinion investors shouldn't take Federal Open Market Committee statements
that seriously, because they can quickly change. Do not treat stated goals
as binding, because usually something else is at stake other than what is stated
in their goal.

What does it indicate to us about the currents of the gold market and government's
influence on it? Overall government spending, especially via the central banking
system, is generally not decreasing and the Fed is making sure that banks can
go on with pooling more funds into the broken financial system. Since this
is about to be continued, it's likely to have a continued positive impact on
the price of gold and gold market in general. Of course, not necessarily right
away, but we are very likely to see gold higher in the coming years.

The above s based on the April gold Market Overview report. We encourage you
to subscribe and
read the full version today.

Matt Machaj, PhD, is an economist whose research is focused on the monetary
policy, the gold standard, and alternative monetary regimes. Matt is a university
professor, blogger, publicist, founder of the Polish Mises Institute branch,
member of Property and Freedom Society, and laureate of Lawrence Fertig Award.

He is a free market advocate, believes in personal liberty, responsibility,
and believes that social power is a better alternative than government power.
Personally he believes that intelligence is the most powerful thing in the
universe and beyond. He is no fan of conspiracy theories, but likes to study
conspiracy practices.

You can read Matt's premium analysis at Sunshine Profits, where he publishes
his gold
Market Overview - monthly reports that focus on the big, fundamental
picture and key things that can affect investors over the long run.

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